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BMT MARKET SUMMARY – 5/13/2019

Market Summaries

For the week ending May 10

Deal or No Deal?  No Deal, at Least Not Yet

The U.S. financial markets were largely focused on one event over the past week: trade negotiations between the U.S. and China. President Trump heightened the consequences of these negotiations last Sunday when he announced that tariffs would be increased on Chinese imports late in the week, seemingly trying to increase the pressure on China to agree to a deal.

While the negotiations were only set to begin on Thursday, given the threat of added tariffs and the drag that they could have on global economies, the stock market did not wait for the outcome. The S&P 500 Index started the week on a down note and finished each of the first four days with a loss – with the most damage being inflicted on Tuesday (-1.65%). Heading into Friday, the Index was off -2.5% from the prior week’s close.

As U.S. equity exchanges opened for trading Friday, the selling continued, with the S&P 500 off an added -1.5% by late morning. When talks concluded, it was announced that no deal had been reached. However, in an interview, Treasury Secretary Mnuchin termed the talks constructive. This comment, along with a tweet from President Trump calling the negotiations “candid and constructive” were enough to turn the tide. Stocks rallied sharply in the afternoon, fully reversing the -1.5% loss registered in the morning to close out the day with modest gains.

S&P 500 Index
(For the one week ending May 10)

Chart: S&P 500 for the weekSource: FactSet, Inc.

The chart above details the intraday trading activity of the Index for the week. While the S&P 500 ceded -2.1% for the five-day period, it still finds itself higher by +15.8% for the year-to-date. International stocks (MSCI EAFE) did a bit worse, declining by -2.6%, while emerging markets equities (MSCI EM) performed particularly poorly, posting a -4.5% loss for the week.

Looking at individual sectors within the S&P 500, each finished the week in the red, with information technology suffering the worst losses (-3.4%), while the more defensive consumer staples (-0.3%) and utilities (-0.6%) registered lesser declines.

Bonds Catch a Bid

Volatility and declines in the stock market often push bond prices higher (yields lower) as investors seek a safe haven. That was certainly the case last week, as the yield on the benchmark 10-year Treasury closed out trading on Friday at 2.47%, six basis points (0.06%) lower than where it started the week.

Fixed-income investments also benefited from the continued benign inflationary environment. On Thursday, it was announced that the Producer Price Index (PPI) – excluding food and energy – increased +0.1% for the month of April, less than the +0.2% consensus forecast. The same held true on Friday, when the April Consumer Price Index (CPI) figures – without food and energy – were released. They too came in at +0.1%, below the consensus of +0.2%.

CPI excluding Food & Energy
(Year-over-Year Change for the Trailing 5 Years)Chart: 5 year CPI (Consumer Price Index)

Source: FactSet, Inc.

With unemployment at 50-year lows, potential inflationary pressures are certainly a concern for the Federal Reserve. The figures from the past week provide little proof that any such pressures are building. The chart above shows the year-over-year increase in the CPI over the past five years. As the chart indicates, this inflationary gauge has been running at roughly 2% per year, with the rate trending mostly lower over the past few months in spite of the strong jobs environment.

With the Fed on the Sidelines, China Takes Center Stage

With the Fed in pause mode and earnings season largely completed, China has clearly taken center stage. Investors seemed to be rather optimistic earlier this year that a trade deal would soon be reached. This past week derailed that notion, particularly when President Trump indicated on Friday that he was in “absolutely no rush” to finalize any such deal. Consequently, the headwinds and volatility that this issue creates are likely to be ongoing for some time. Still, as this past Friday’s rebound shows, investors seem to believe that in the end it will eventually be deal, not no deal.

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